Credit Score basics for beginners

In my opinion, 2008 will be an awesome year for first-time home buyers and buyers generally. A basic understanding of your "FICO" or credit score, and how to make it the best possible score is becoming increasingly important because of the turbulence in the lending market. Gone are the days when a less than stellar credit score could give you easy access to credit. Keeping your score in the 700+ range is where you want to be.

Paying attention to some simple points will help the buyer go a long way into homeownership.

The formula for the FICO (Fair Isaac Corp) score is based on the following:

- 35% of the score is based on your payment history: late payments are a no, no! Paying credit cards, car loans and the like even a few days late can do significant damage.

- 30% of the score is based on the amount you owe in proportion to your available credit: "maxing out" your credit cards is another big no, no. If your have a credit line of say $5000, make sure you do not keep a balance of more than half that amount. 

- 15% of the score is based on the length of credit history: even if you are unhappy with the terms of a particular credit card, do not cancel it. Its better to pay it off, transfer the debt to another card with better terms, but keep the old account on the books with a zero balance.

- 10% of the score takes into account new credit: opening new lines of credit just before applying for a mortgage is not a good idea. To take advantage of the strategy in the previous point, do so long before starting the home buying process.

- 10% of the score is based considering the mix of credit: its better to have different types of credit than just one, so having an installment loan for a purchase, plus keeping up with credit card payments is a plus.

I hope this helps some folks out there -- and for my French-speaking clients, "consultez mon blog en francais".